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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 2 Presentation Outline The Post-Crisis Economy & Workers Compensation  The scars of the “Great Recession” are still visible on the WC line The New American Labor Force The Reindustrialization of America The Future of Healthcare in the United States  WC’s future in inextricably linked to influences in this key sector Workers Compensation Operating Result Update Workers Compensation: The Next 100 Years Q&A

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The Slow and Uneven Nature of the Economic Recovery Is Changing the WC Playing Field 3 Despite a Still-Sluggish Economy, there Are Potent Growth Drivers for Workers Comp and Commercial Insurers in General 12/01/09 - 9pm 3

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5 Real GDP by State Percent Change, 2012: Highest 25 States Sources: US Bureau of Labor Statistics; Insurance Information Institute. North Dakota was the economic growth juggernaut of the US in 2012—by far Only 10 states experienced growth in excess of 3%, which is what we would see nationally in a more typical recovery

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6 Real GDP by State Percent Change, 2012: Lowest 25 States Sources: US Bureau of Labor Statistics; Insurance Information Institute. Connecticut was the only state to shrink in 2012 Growth rates in 8 states (and DC) were still below 1% in 2012

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State-by-State Leading Indicators through 2014:Q2 Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute.http://www.philadelphiafed.org/index.cfm 12/01/09 - 9pm 7 The economic outlook for most of the US is positive for the first time in many years

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Consumer Sentiment Survey (1966 = 100) January 2010 through March 2014 Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past 2+ years, though uncertainty in Washington sometimes takes a toll. Source: University of Michigan; Insurance Information Institute Optimism among consumers dropped in Q3 2013 as the government shutdown created uncertainty, then rebounded though the harsh winter took a toll 12/01/09 - 9pm 8 Impact of 2011 budget impasse

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12/01/09 - 9pm 9 (Millions of Units) New Private Housing Starts, 1990-2019F Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/14 and 3/13); Insurance Information Institute. Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction for several more years

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Florida Total Private Housing Starts, 2000 – 2017F 12/01/09 - 9pm 21 The economic outlook for most of the US is positive for the first time in many years Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspxhttp://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx CRASH, CRATER, RECOVERY Homebuilding in FL continues to recover, but employment and WC exposures will take more than a decade to recover (Thousands of Units)

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 22 ($ Billions) Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments Grapple with Deficits and Federal Sequestration Takes Hold Value of New Federal, State and Local Government Construction: 2003-2013* *2013 figure is a seasonally adjusted annual rate as of December. Sources: US Department of Commerce; Insurance Information Institute. Construction across all levels of government peaked at $314.9B in 2009 Austerity Reigns Govt. construction is still shrinking, down $40.5B or 12.9% since 2009 peak

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12/01/09 - 9pm 23 Value of Public Construction Put in Place, by Segment, Jan. 2014 vs. Jan. 2013* Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014. Growth (%) *seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.http://www.census.gov/construction/c30/c30index.html Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging on public entity risk exposures Highway, Transport, and Power projects lead public sector construction

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12/01/09 - 9pm 24 Public Construction by Segment/Project Type, Jan. 2014 vs. Jan. 2013* Public Construction Activity is Down in Most Segments as Governments Grapple with Budget Deficits and Pension Shortfalls Growth (%) State and local public sector construction spending could begin a slow recovery in 2014; Federal spending will languish. *seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.http://www.census.gov/construction/c30/c30index.html

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 Construction Employment, Jan. 2003–February 2014 Note: Recession indicated by gray shaded column. Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. The “Great Recession” and housing bust destroyed 2.3 million constructions jobs The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit. Construction employment troughed at 5.435 million in Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge from the April 2006 peak 12/01/09 - 9pm 26 Construction employment peaked at 7.726 million in April 2006 (Thousands) Construction employment as of Feb. 2014 totaled 5.941 million, an increase of 506,000 jobs or 9.3% from the Jan. 2011 trough

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27 The New American Labor Force The Recovery’s Winners and Losers Are Reshaping the Sources of WC’s Payroll Exposure Base 12/01/09 - 9pm 27

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 Unemployment and Underemployment Rates: Still Too High, But Falling “Headline” unemployment was 6.7% in February 2014. 4% to 6% is “normal.” Source: US Bureau of Labor Statistics; Insurance Information Institute. U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 12.6% in Feb. 2014. 8% to 10% is “normal.” January 2000 through February 2014, Seasonally Adjusted (%) Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving. 12/01/09 - 9pm 28 As the unemployment rate approaches 6%, the Fed will begin signaling on short- term rates

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Monthly Change in Private Employment January 2007 through February 2014 (Thousands, Seasonally Adjusted) Private Employers Added 8.34 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm Monthly losses in Dec. 08–Mar. 09 were the largest in the post-WW II period 162,000 private sector jobs were created in February 12/01/09 - 9pm 30 Jobs Created 2013: 2.368 Mill 2012: 2.294 Mill 2011: 2.400 Mill 2010: 1.277 Mill

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Cumulative Change in Private Employment: Dec. 2007—Dec. 2013 December 2007 through December 2013 (Millions) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm Cumulative job losses peaked at 8.765 million in February 2010 Cumulative job losses as of Dec. 2013 totaled 587,000. 12/01/09 - 9pm 31 Private Employers Added 8.14 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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Cumulative Change in Government Employment: Jan. 2010—Dec. 2013 January 2010 through Dec. 2013* (Millions) Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institutehttp://www.bls.gov/data/#employment Cumulative job losses through Dec. 2013 totaled 631,000 12/01/09 - 9pm 33 Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis: Sequestration Will Add to this Toll Government at all levels has shed more than 600,000 jobs since Jan. 2010 even as private employers created 8.14 million jobs, though losses may now be stabilizing. Temporary Census hiring distorted 2010 figures

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 34 Net Change in Government Employment: Jan. 2010—Dec. 2013* (Thousands) Local government employment shrank by 424,000 from Jan. 2010 through Dec. 2013, accounting for 67% of all government job losses, negatively impacting WC exposures for those cities and counties that insure privately *Cumulative change from prior month; Base employment date is Dec. 2009. Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institutehttp://www.bls.gov/data/#employment State government employment fell by 1.9% since the end of 2009 but is recovering while Federal employment is down by 3.8% and deteriorating

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35 Unemployment Rates by State, February 2014: Highest 25 States* *Provisional figures for February 2014, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. In February, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.

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36 Unemployment Rates by State, February 2014: Lowest 25 States* *Provisional figures for February 2014, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. In February, 29 states had over-the- month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 37 US Unemployment Rate Forecasts Unemployment will remain high even under the most optimistic of scenarios, but forecasts are being revised downwards Sources: Blue Chip Economic Indicators (May 2013); Insurance Information Institute Quarterly, 2013:Q1 to 2014:Q4

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 40 Labor Force Participation Rate by Gender, 1948—2013 (Percent) Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 86.6% or working age men participated in the labor force in 1948 compared to 32.7% or women By 2013, 57.2% of working age women participated in the labor force, up from 32.7% in 1948 but down from its all time high of 60.0% in 1999 By 2013, the labor force participation rate for men had declined to 69.7% while the participation rate for women had risen to 57.2%

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12/01/09 - 9pm 41 Labor Force Participation by Sex and Education through the Crisis: 2006, 2010 and 2013 The composition and character of the U.S. labor force is changing rapidly. Winners and losers have clearly emerged. What does this mean for WC? Unemployment Rate (%) Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. Men were hit harder and continue to do worse than women in the job market. Women are likely to do better than men for the indefinite future. Workers lacking a college degree suffer from much higher rates of unemployment

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Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q2 Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. The brown bars indicate recessions. Labor Force participation rate The labor force participation rate for workers 65-69 might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings. 1 in 3 in this age group are working. Virtually none of them are “baby boomers”

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Labor Force Participation Rate, Ages 70-74, Quarterly, 1998:Q1-2013:Q2 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. Labor Force participation rate The labor force participation rate for workers 70-74 grew by about 50% since 1998. Growth stalled during and after the Great Recession but has since resumed. Nearly 1 in 5 in this age group is working. A dozen years ago it was 1 in 8.

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46 Fatality Rates Improved Slightly Since 2006 but Still Climb Sharply With Age Source: US Bureau of Labor Statistics, at http://www.bls.gov/iif/oshcfoi1.htm/#2010http://www.bls.gov/iif/oshcfoi1.htm/#2010 The fatality rate for workers 65 and older was 5 times that of workers age 25-34. The workplace of the future will have to be completely redesigned to accommodate the surge in older workers. Fatal Work Injury Rate per 100,000 full-time-equivalent workers No improvement in fatal work injury rate for this age group

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47 Older Workers Lose More Days from Work Due to Injury or Illness Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011 (Table 10), released November 8, 2012. Median Days Away From Work Youngest baby boomer is age 48 (in 2013) Median lost time of workers age 65+ is 2-3X that of workers age 25-34 Oldest baby boomer is age 67 (in 2013)

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48 Older Workers Are Much More Likely to Break a Bone *per 10,000 full-time-equivalent workers Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14http://www.bls.gov/news.release/pdf/osh2.pdf Incidence Rate* (2011)

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49 Older Workers Are More Likely to Slip When Walking, but Less Likely to Overexert Themselves Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14http://www.bls.gov/news.release/pdf/osh2.pdf Incidence Rate (2011) Source/Nature of Injury:

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50 The Reindustrialization of America American Industrial Might Is Making a Comeback A Golden Opportunity for Workers Comp Insurers? 12/01/09 - 9pm 50

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ISM Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through February 2014 The manufacturing sector expanded for 48 of the 50 months from Jan. 2010 through February 2014. Weakness in early 2014 stems largely from harsh winter weather and weakness in China. Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.http://www.ism.ws/ismreport/mfgrob.cfm Manufacturing continued to expand in early 2014 12/01/09 - 9pm 52

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12/01/09 - 9pm 53 Manufacturing Growth for Selected Sectors, 2013 vs. 2012* Manufacturing Is Expanding—Albeit Slowly—Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages Growth (%) Manufacturing of durable goods was especially strong in 2012 but weakened in 2013 *Seasonally adjusted; Date are YTD comparing data through November 2013 to the same period in 2012. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/ Durables: +3.4% Non-Durables: +0.2%

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12/01/09 - 9pm 54 Durable Manufacturing: New Order Growth and Shipments, 2013 Manufacturing Is Expanding: New orders exceed shipments which suggests the industry is in an expansionary phase Growth (%) Most manufacturing sectors indicate order growth outstripping shipments, a favorable indicator for investment and expansion *Seasonally adjusted; Date are advance report YTD data comparing data through December 2013 to the same period in 2012. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/

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Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.http://www.federalreserve.gov/releases/g17/Current/default.htm 55 Percent of Industrial Capacity Hurricane Katrina March 2001- November 2001 recession “Full Capacity” The closer the economy is to operating at “full capacity,” the greater the inflationary pressure The US operated at 79.2% of industrial capacity in Dec. 2013, well above the June 2009 low of 66.9% but is still below pre-recession levels. December 2007- June 2009 Recession March 2001 through December 2013 12/01/09 - 9pm 55

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 Manufacturing Employment, Jan. 2010—February 2014 * Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high. *Seasonally adjusted; Jan. and Feb. 2014 are preliminary Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.http://data.bls.gov (Thousands) Since Jan 2010, manufacturing employment is up (+605,000 or +5.3%) and still growing.

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57 Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth Accelerating business investment will be a potent driver of commercial property and liability insurance exposures and should drive employment and WC payroll exposures as well (with a lag) Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

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U.S. Natural Has Imports and Exports, 1990 - 2040 Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 12/01/09 - 9pm 58 Trillions of Cubic Feet The US is now the largest gas producer in the world, though Russia is the largest exporter. The US needs to invest in its pipeline and LNG infrastructure and expedite regulatory approval to realize its full export potential

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60 Growth in Health Professions, 1991-2013 Sources: Bureau of Labor Statistics, Insurance Information Institute. (Percent Annual Change) Healthcare employment has continued to grow in good times and bad - including the Great Recession. Average Annual Growth Average Healthcare: 2.5% Total Nonfarm: 1.0% The U.S. economy lost more than 8 million jobs during the Great Recession, but health sector employment expanded

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62 The Future of Healthcare in America Workers Comp Is Increasingly Along for the Ride in the American Health Care Saga 12/01/09 - 9pm 62

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U.S. Health Care Expenditures, 1965–2022F U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth, inflation of GDP growth 12/01/09 - 9pm 63 From 1965 through 2013, US health care expenditures had increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have increased 119 fold. $ Billions Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html

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National Health Care Expenditures as a Share of GDP, 1965 – 2022F* Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html 1965 5.8% Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to reach 19.9% of GDP by 2022 % of GDP 2022 19.9% 1980: 9.2% 1990: 12.5% 2000: 13.8% 2010: 17.9% Since 2009, heath expenditures as a % of GDP have flattened out at about 18%--the question is why and will it last?

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WC Medical Severity Generally Outpaces the Medical CPI Rate Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states. Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but the gap is narrowing.

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IssueConcernContravening Argument Surge in People Covered by Health Insurance System is overwhelmed MD shortage Patient care adversely impacted Over time, people will have access to preventative care, improving the general health of the population Greater use of PA’s, etc. Electronic Health Records Cost Computerization of patient data could help flag issues and improve risk management and improve patient outcomes Claim Shifting Provider/patient may prefer claim handled via WC system Reduction in uninsured population reduces shifting Source: Insurance Information Institute research; WCRI. 69 A Few Potential Impacts of the ACA on Workers Compensation

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●WC rates often tied to WC but can change for reasons independent of this link ●There could be both positive and negative effects of a cut in Medicare rates on WC performance in states which tie reimbursement to Medicare –WC reimbursement rates would go down –Doctors may be unwilling to see WC patients:  64% of Dr.’s surveyed said they would stop accepting new Medicare patients if planned rate cuts go through; some of these same doctors may also refuse WC patients if WC rates also decrease ●These effects would likely be short lived –All states which tie their fee schedules to Medicare already increase the Medicare rates to set WC rates, so any drop in the Medicare rates would likely be soon offset by a higher WC adjustment ACA Impact on WC May Occur via Changes in Rates Set by State Regulators WC Maximum Allowable Reimbursement Rates as Percentage of Medicare SOURCE: NCCI Annual Issues Symposium 2009, Medicare’s Impact on Workers’ Compensation, AMA: “Physicians’ reactions to the Medicare physician payment cuts” from 3/13/13 presentation by Christopher Cunniff, FCAS, of Liberty Mutual. WC rates tied to Medicare WC rates not tied to Medicare

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 72 Possible Effects on Workers Comp 1.Could slow the growth in WC medical care costs  IPAB recommendations and PCORI reports, plus Medicare changes, could have beneficial effects on cost and treatment effectiveness 2.Could ACA be first step in federal regulation of insurance products and markets?  Will regulation like that requiring products to be priced to meet Medical Loss Ratios be applied to WC?  Will cost-control mechanisms such as the Independent Payment Advisory Board be developed for WC?  Will WC insurers lose their limited exemption from anti-trust laws that they have had under McCarran-Ferguson since 1945?

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Number of People Signed Up for Health Care Under the ACA, Oct. 1 – March 1 12/01/09 - 9pm 74 759,800 Source: Centers for Medicare and Medicaid as of March 7, 2014: http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2014/ib_2014mar_enrollment.pdf http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2014/ib_2014mar_enrollment.pdf As of March 1, 4.2 million people have signed up for coverage under the ACA since enrollment opened on Oct. 1, 2013 UPDATE HHS announced that enrollment as of 3/16 now exceeds 5 million

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 75 Projected Number of People with No Health Insurance, 2013—2022* Millions The projected decline in the uninsured population is very sensitive to the enrollment rate under the Affordable Care Act By 2018 the number of people under age 65 without insurance is expected to drop by 25 million (~45%) 12/01/09 - 9pm 75 *Under age 65. Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html

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Workers Compensation Combined Ratio: 1994–2014F Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007- 2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute (2013-14). 12/01/09 - 9pm 82 WC results have improved markedly since 2012

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83 Return on Net Worth, 2003-2012, Workers Comp vs. All P/C Lines Sources: NAIC, Report on Profitability by Line by State in 2012. (Percent) WC Has Been Marginally Less Profitable than the P/C Insurance Industry Overall Average: 2003-2012 WC: 7.1% All P/C Lines: 7.9%

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84 Workers Comp Return on Net Worth, 2012 Sources: NAIC; Insurance Information Institute * Denotes results exclude state funds. Other state funds are included in results 9 states posted double-digit profits in WC in 2012 Top 25 States Percent

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85 Sources: NAIC; Insurance Information Institute * Denotes results exclude state funds. Other state funds are included in results. In 2012, in 7 states the Return on Net Worth was under 4% Bottom 25 States Workers Comp Return on Net Worth, 2012 Percent

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86 Change in Price Paid for Medical Professional Services in WC, 2002-2012* *Data are preliminary as of 6/30/12. Sources: Workers Compensation Research Institute, WCRI Medical Price Index for Workers Compensation, 5 th Edition; Ins. Info. Institute. 12/01/09 - 9pm States in GOLD had no fee schedule in 2012. These generally saw larger increases in WC medical costs over the past decade. Increases in WC med costs varied enormously over the past decade from a high of 56% in Wisconsin to a low of 2% in North Carolina %

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Indemnity Claim Cost ($ 000s) Annual Change 1991–1993:-1.7% Annual Change 1994–2001:+7.3% Annual Change 2002–2011:+3.2% Accident Year Workers Comp Indemnity Claim Costs: Small Increase in 2012 Average indemnity costs per claim were up 1% in 2012 to $22,400 Average Indemnity Cost per Lost-Time Claim 2012p: Preliminary based on data valued as of 12/31/2012. 1991-2011: Based on data through 12/31/2011, developed to ultimate Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

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Workers Compensation Lost-Time Claim Frequency Declined in 2012 Lost-Time Claims 89 Percent Accident Year *Adjustments primarily due to significant audit activity. 2012p: Preliminary based on data valued as of 12/31/2012 1991–2011: Based on data through 12/31/2011, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level Source: NCCI. Cumulative Change of –55.4% (1991–2011 adj.)

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Impact of Discounting on Workers Compensation Premium NCCI States—Private Carriers 102 Policy Year p Preliminary Dividend ratios are based on calendar year statistics NCCI benchmark level does not include an underwriting contingency provision Based on data through 12/31/2011 for the states where NCCI provides ratemaking services Source: NCCI. Percent

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 108 U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2014* *Monthly, through February 2014. Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.http://www.federalreserve.gov/releases/h15/data.htm Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. Yields on 10-Year U.S. Treasury Notes recently plunged to record modern-era lows in early 2013 but have since risen as the Fed begins “tapering” its QE program in 2014 12/01/09 - 9pm 108

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 109 U.S. Treasury Security Yields: A Long Downward Trend, 1990–2014* *Monthly, constant maturity, nominal rates, through February 2014. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.federalreserve.gov/releases/h15/data.htm Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. U.S. Treasury yields plunged to historic lows in 2013. Only longer-term yields have rebounded. 12/01/09 - 9pm 109

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12/01/09 - 9pm 110 Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2014 Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Even as the Fed “tapers” rates are unlikely to return to pre-crisis levels anytime soon The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers. Source: Federal Reserve Board of Governors; Insurance Information Institute.

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12/01/09 - 9pm 115 P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012 Source: A.M. Best; Insurance Information Institute 2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969 Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

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12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 116 Number of Recessions Endured by P/C Insurers, by Number of Years in Operation Sources: Insurance Information Institute research from National Bureau of Economic Research data. Number of Recessions Since 1860 Many US Insurers Are Close to a Century Old or Older Number of Years in Operation Insurers are true survivors—not just of natural catastrophes but also economic ones 12/01/09 - 9pm 116

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12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 121 Workers Compensation Timeline Industrialization of US in the Late 19 th /Early 20 th Century Led to Increasing & Unacceptably High Number of Deaths and Injuries Among Workers  In 1912, an estimated 18,000 to 23,000 workers were killed on the job (compared to 5,071 in 2008) and approximately 4.7 million (12% or workforce) suffered a nonfatal illness or injury (compared to 3.7 million 2008)  The 1912 death/injury rates would imply 75,600 deaths and 17 million injuries today  More awareness of broader impacts on families of injured/killed workers Workers Could Seek Redress Under Tort Law, But Seldom Prevailed  Employers usually won suits filed by injured workers by arguing: –Contributory Negligence: Employee was at least partially to blame for the accident –Assumed Risk: By taking the job, the employee understood the hazards involved –Fellow Servant Rule: A fellow worker caused the accident, so the employer was not at fault European Countries Began to Implement Workers Compensation Programs  Germany (1884); England (1897) Insurers Began to Sell Commercial Liability Coverage in the Late 1800s  Coverage for inadvertent errors became more commonplace  In the workforce, such policies became the first employer liability policies Source: Insurance Information Institute.

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12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 123 Cumulative Number of WC Laws Passed, 1910-1920 Source: http://eh.net/encyclopedia/article/fishback.workers.compensation; Insurance Information Institute. New York was the first state to pass a WC law in 1910, and Ohio was one of the first ten when its law passed in 1911. By 1920, 43 of the 48 states at that time had passed WC laws

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12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 124 Workers Compensation: 4 Predictions for the Next 100 Years 1.The Workplace Will Become Safer  Continuation of a nearly century long trend  Deaths and injuries will continue to fall and perhaps plummet due to improvements in risk management, technology and medicine  Technologies such as autonomous (driverless vehicles) will likely be a reality within 20- 25 years causing motor-vehicle related fatalities and injuries (including MSDs) to fall 2.The Footprint of Federal Regulation on Insurance Will Increase  TRIA: Workers comp is arguably the most TRIA-dependent line  Post-Dodd-Frank: One (and in the future perhaps more) Systemically Important Financial Institution (SIFI) is a big WC insurer; The Fed is the ultimate regulator of SIFIs  Other WC insurers and reinsurers could be designated as Internationally Active Insurance Group (IAIG); Impact of this in the US is still unclear; More capital?  Federal Insurance Office (FIO): Pushing for greater consistency in state regulation  Affordable Care Act and subsequent healthcare legislation  Will the federal government take direct interest in WC? – It already has (e.g., TRIA) but will not seek to completely usurp states –As WC medical loss share rises, WC will get pulled into a tighter federal orbit  Insurers could once again resurrect the Optional Federal Charter debate  Bottom Line: The federal regulatory camel’s nose is under the tent; The hump is next. Source: Insurance Information Institute.

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12/01/09 - 9pm Workplace Fatalities, 1945-2012 Source: Bureau of Labor Statistics; National Safety Council; Insurance Information Institute Workplace deaths and injury rates have been falling for decades—trends that will likely continue for many years to come

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12/01/09 - 9pm 126 U.S. Workforce Injury & Illness Rates, 1973-2012 Sources: Bureau of Labor Statistics; Insurance Information Institute Workplace injury rates have declined in all industries from 11.0 in 1973 to 3.4 in 2012; in the same period injury rates in manufacturing declined from 15.3 to 4.3 and in construction from 19.8 to 3.7. (Injuries and Illnesses per 100 Full-Time Workers)

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12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 129 3.Businesses Will Retain More Risk  Large deductible programs, self-insurance and use of captives will grow  Driven by more sophisticated risk management throughout corporate America and build- up of cash on corporate balance sheets (phenomenon of increased risk retention is occurring for most types of property and liability risks)  Some catastrophic WC exposures could be securitized 4.Medical Costs Will Continue to Rise  Technology, advancements in medicine will drive costs higher  Co-morbidities persist but may plateau; May improve over the span of decades  Supply/Demand imbalances for med services unlikely to persist beyond next 20 years  Consolidation in the healthcare space is likely; Net impact is upward price pressure  Digitization of patient med records per ACA is costly but ultimately should save money  BUT: “Big Data” drive should improve patient outcomes and lower costs  IF: Population projections are correct, aging will be less of an issue after 2030 or so  AND: People will live significantly longer but will not work that much longer Source: Insurance Information Institute. Workers Compensation: 5 Predictions for the Next 100 Years

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